Technology profit leaks

Managing a technology budget for an IT group is an activity that is full of opportunity to help the bottom line of a business. It’s a cost center, not a profit center. But while the game may not be about maximizing top line revenue, any money removed from the IT budget directly impacts the bottom line or the overall profit of the company. Unlike the revenue equation which is reduced by variable and fixed costs, the expenses in the IT budget affect the net income bottom line dollar-for-dollar.

What’s in your budget?

The IT budget is often bloated with expenses that become forgotten. A prime example is maintenance contracts for equipment and software. Providers love the maintenance contracts which often account for 20% of the original sales price of a product. Do the math. If the lifespan of the product is five years then the provider has doubled their income. The danger for the IT budget is when the product is retired from service but the maintenance agreement is not cancelled. This is a prime example of a profit leak!

Another example of a profit leak is an agreement for a recurring service that could be renegotiated for better rates. Cell phone bills, data lines, data center services are services with ongoing recurring charges. Just like we can often negotiate a better price or find a better price in the open market for home services, these types of business services present the same opportunity.

The capital expense game.

Capitalizing expenses is another way to help the bottom line for a reporting period. The isn’t quite the same as reducing costs since capitalizing is spreading the cost of a product or service over time. I often think of this as a game since the finance group has choices if they want to expense or capitalize an item as long as they stay within accounting rules.

Recouping costs.

Another key way to reduce expenses is to recoup costs by charging for value-added services. For example, if the IT programmers are creating a service for a client that provides value such as reducing internal costs (for the client) then the IT services may be billable. The expense of the programming effort can be reclassified as cost of goods sold. The cost still factors into the bottom line, but the top line revenue increases to offset the overall expense.

Play the game.

So as a technology leader, there is ability to influence the bottom line results by controlling expenses. It’s the game of business. The game of profits.